Individual Taxation and Governmental Accounting Review

Vocabulary flashcards covering individual tax rules, like-kind exchanges, self-employment taxes, home office deductions, Qualified Business Income (§199A), and governmental fund accounting principles.

Capital Loss Carryover (Individuals)

Unused net capital losses of individual taxpayers that can be carried forward indefinitely to offset future capital gains and up to $\$3,000$ of ordinary wage income per year.

Personal-Use Asset Losses

Realized losses incurred on the sale of personal-use assets (such as furniture, personal vehicles, or appliances), which are strictly non-deductible for tax purposes.

Dividend Reinvestment Plan (DRIP) Tax Treatment

An arrangement where dividend proceeds are automatically used to purchase additional shares of stock; these dividends remain taxable in the year received despite not being distributed in cash.

Amount Realized

The total value received from the disposition of property, calculated as: $\text{Cash Received} + \text{FMV of Property Received} + \text{Debt Relief} - \text{Selling Costs}$.

§1031 Recognized Gain

In a qualified like-kind exchange, the amount of realized gain recognized as taxable income, determined as the lesser of realized gain or boot received.

Boot in a Like-Kind Exchange

Non-like-kind property or cash transferred in a §1031 exchange; receiving boot triggers recognized gain up to realized gain, while paying cash boot alone does not trigger gain recognition.

Basis in Replacement Property (§1031)

The tax basis assigned to newly acquired like-kind property, computed as: $\text{Adjusted Basis of Old Property} - \text{Cash Received} + \text{Recognized Gain}$.

§121 Principal Residence Exclusion

A provision allowing qualifying homeowners to exclude up to $\$250,000$ (for single filers) or $\$500,000$ (for married filing jointly) of gain realized on the sale of a principal residence.

§121 Partial Exclusion

A pro-rated exclusion permitted when a taxpayer fails the two-year ownership and use tests due to unforeseen circumstances (such as a job relocation), calculated as: $\text{Maximum Exclusion} \times \left(\frac{\text{Qualifying Months}}{24}\right)$.

Single-Member LLC (Default Classification)

Under IRS entity classification rules, a domestic single-member limited liability company is treated by default as a disregarded entity and taxed as a sole proprietorship.

Multi-Member LLC (Default Classification)

Under IRS entity classification rules, an unincorporated business entity with two or more owners that is classified and taxed by default as a partnership.

C Corporation Loss Treatment

The rule establishing that C corporations are separate taxpaying entities whose business losses do not flow through to shareholders' personal tax returns.

Hobby Income and Expense Rules

The tax standard requiring all prize money and gross income from a hobby activity to be included in taxable gross income, while completely disallowing related hobby expenses as deductions.

Simplified Home Office Deduction Method

An optional safe-harbor deduction equal to $\$5$ per square foot of allowable home office space up to $300\,\text{sq. ft.}$ (maximum $\$1,500$), allowing the taxpayer to still deduct mortgage interest and property taxes in full on Schedule A.

W-2 Remote Employee Home Office Rule

The rule prohibiting W-2 employees from deducting home office expenses or allocable household costs, even if space in their home is used regularly and exclusively as a principal place of business.

Specified Service Trade or Business (SSTB)

Fields under §199A (such as law, health, and financial services) where the qualified business income (QBI) deduction completely phases out to $0$ once individual taxable income exceeds the phase-out limit.

Engineering Services (QBI Status)

A professional service category specifically excluded from SSTB classification under §199A, remaining eligible for the QBI deduction without service-type disqualification at higher income tiers.

Social Security Wage Base Limit

The annual maximum earnings threshold ($\$176,100$ for 2025) subject to the $6.2\%$ employee Social Security tax and the $12.4\%$ self-employment Social Security tax.

Additional Medicare Tax

A $0.9\%$ tax on earned income exceeding statutorily specified thresholds, such as $\$200,000$ for single and head of household filers, and $\$250,000$ for married taxpayers filing jointly.

Net Self-Employment Taxable Earnings

The statutory base subject to self-employment tax, calculated as net profit from Schedule C multiplied by $92.35\%$.

Business Meals Deduction Limit

The tax limitation permitting only $50\%$ of eligible ordinary and necessary business meals (such as client meals during business discussions or travel meals) to be deducted.

Business Entertainment Expenses

Expenses incurred for social or sporting activities with clients (such as sporting event tickets), which are $0\%$ deductible under federal tax law.

Employee Holiday Party Deduction

Company-wide recreational social gatherings held for all employees, which qualify for a $100\%$ tax deduction.

Proprietary Funds

Governmental funds that account for ongoing business-like activities—consisting of internal service funds and enterprise funds—and operate on the full accrual basis of accounting.

Governmental Funds

The general tax-supported fund category consisting of the general fund, special revenue funds, debt service funds, capital projects funds, and permanent funds.

Fiduciary Funds

Fund groups—including trust and agency funds—used to account for resources held by a governmental entity as a trustee or custodian for individuals, private organizations, or other governments.

Modified Accrual Method

The accounting method used by governmental funds in which revenues are recognized when they become both measurable and available to finance current-period expenditures, and expenditures are recognized when liabilities are incurred.

Appropriations

The formal legal authorization enacted by a governmental legislative body to incur obligations and make expenditures for designated purposes.

Estimated Revenues

The budgetary account reflecting projected statutory resource inflows to be collected by a governmental unit during a budget period.

Encumbrances

Commitments recorded in budgetary accounting when purchase orders or contracts are issued to preserve appropriation authority; they represent encumbered resources rather than liabilities because goods or services have not yet been received.

Nonlapsing Encumbrances

Outstanding purchase orders and encumbrances whose underlying appropriation authority carries over into the next fiscal year rather than expiring at year-end.

Budgetary Fund Balance

A governmental budgetary equity account that reflects the difference between estimated revenues/other financing sources and appropriations/other financing uses, tracking an expected budget surplus or deficit.

Interfund Services Provided or Used

Transactions between governmental funds that simulate external arm's-length commercial dealings (such as the general fund purchasing services from an internal service fund or enterprise fund), recorded as fund expenditures and fund revenues.

Interfund Transfer

A nonreciprocal movement of cash or resources between funds without requirement for repayment, such as an initial cash contribution from the general fund to establish an internal service fund.

Consumption Method (Supplies)

An inventory accounting approach under which inventories are recognized as expenditures only in the period and amount that supplies are actually consumed.

Derived Tax Revenues

Nonexchange revenues derived from governmental assessments levied on underlying exchange transactions, including personal income taxes and retail sales taxes.

Imposed Nonexchange Revenues

Revenues resulting from statutory assessments imposed on nonexchange acts, including real property taxes, property tax levies, and regulatory fines.

Government-Mandated Nonexchange Transactions

Intergovernmental grants or resource transfers from a higher-level government that require the recipient government to provide specific mandated programs (such as welfare or state-mandated environmental initiatives).

Voluntary Nonexchange Transactions

Bilateral agreements or donations entered into willingly by a governmental entity, including research grants, park bequests, and voluntary incentive programs.

Nonspendable Fund Balance

The classification of fund balance that includes amounts that are not in spendable form (such as inventory or prepaid items) or are legally or contractually required to remain intact.

Restricted Fund Balance

Fund resources subject to specific purposes externally imposed by creditors, grantors, contributors, or laws passed by higher-level governments.

Committed Fund Balance

Fund resources constrained to specific purposes by formal, binding action of the government's highest level of decision-making authority prior to fiscal year-end.

Assigned Fund Balance

Fund resources intended by the government to be used for a specific purpose (such as school lunch programs or open encumbrances), reflecting intent without a formal legislative commitment.

Unassigned Fund Balance

The residual classification of spendable resources in the general fund that have not been restricted, committed, or assigned to specific purposes.